Common use of Market Context & Analysis Clause in Contracts

Market Context & Analysis. In order to redevelop the airport it is paramount to understand the projected number of passengers and aircraft that will use the airport in the future. This will ensure that all airport facilities are sized to cater for the future traffic and that the estimated revenue streams coming from the aviation industry are satisfactory enough to recoup the monetary investment being undertaken for the redevelopment of this key infrastructure for Bermuda. A total of 774,000 passengers travelled through Bermuda airport in 2013, representing a decrease of 25% compared to 1995 levels. This downward trend continued in 2014, dipping to 750,000 passengers, a further 3% decline. Passenger traffic at Bermuda can be differentiated into four main segments:  outbound Bermudans,  inbound vacationers,  inbound visiting friends and relatives, and  inbound business/conferences visitors. Each of these components has different drivers and motives to fly to Bermuda, which is considered as one of the world’s strongest country brands although it has lost some positions in the past few years. Of the four market segments, the loss is predominantly in the inbound vacationers segment which has fallen by 45% since 1998, compared to a background of world traffic growth. The main originating markets for passengers travelling by air are:  United States,  Canada, and  United Kingdom. The market that lost most of the passengers is the United States, with Canada and the United Kingdom traffic being fairly static in recent years. The Canadian market has been static in spite of intense competition between WestJet and Air Canada on the Toronto route, which should have resulted in a stimulation of traffic. The UK market is limited to a single route operated by British Airways to London Gatwick and is not subject to a significant increase in operations. Bermuda US connections have air links only to the main US East Coast airport hubs, which provide access to the main gateways and onward connectivity to passengers. The numbers of flights and seats available to these hubs have decreased over time, thus decreasing the overall connectivity for passengers. In particular the New York JFK route has significantly decreased (through reduction of frequencies and aircraft size) a sign of how Bermuda has lost its appeal among its single largest originating market, the New York metropolitan area. Traffic figures indicate that Bermuda has lost its appeal amongst tourists arriving by air, becoming an “out of fashion” destination, with hotel properties closing down, reduction in the room occupancy rates and restricted seasonality of tourism arrivals. This is due to an unclear product offering, the scarce presence of luxury and world class hotel brands, the limited availability of free land space and the high costs of vacationing in the island compared to other destinations. Bermuda is not geographically part of the Caribbean but it competes against the Caribbean islands for inbound tourists. Consequently, Caribbean islands airports are the best comparators for benchmarking Bermuda airport performance. Key performance indicators for airlines operating between the USA and the Caribbean show that Bermuda has the third lowest load factor performance out of a sample of 27 airports. This leads to airlines reducing aircraft size, dropping frequencies and routes and to an increase in the airline fares. Bermuda’s strength lies in being only 2-3 hours from every city in the US East Coast. The US pre- clearance facility provides a quick way of entering the US from abroad. Unlike most of its Caribbean competitors Bermuda benefits from a diverse mix of traffic, linked to the two largest industries in Bermuda: tourism and the international businesses (i.e. insurance activities). On top of this, Bermudans have a very high propensity to fly due to the high income per capita which leads to a higher spending on travel. Bermuda has lost market share of the total Caribbean tourism marketplace in the last two decades from 4% down to 1%. While other areas of the Caribbean have witnessed an increase in the number of tourists arriving by air, these have decreased in Bermuda. Bermuda ranks last among the Caribbean islands in terms of the growth of air tourist arrivals (-3% CAGR between 1995 and 2012). On the other hand the growth in the cruising sector, with tourists arriving on ships from the US East coast has increased over time. However the monetary contribution of this segment of traffic is much lower than the contribution of tourists arriving by air (which spend more for accommodation, transportation and food on the island). In 2013 the average expenditure by cruise ship visitors was of USD 184 against the USD 1,335 spent on average by air passengers. The growth in tourists arriving by sea creates confidence in the fact that Bermuda is still an appealing destination as a whole, with its strength being close to the US East coast. At the same time it underlines the problems evidenced in the Bermudian hotel stock: lack of international brands and prices higher than market average for products that are poorer than the competitor’s. It is key for Bermuda to redevelop its hotel stock also by increasing the amount of hotel concessions released and possibly the building of further all-inclusive resorts to compete effectively against its regional competitors. The redevelopment of the airport, together with the revitalisation of the Bermuda Business Development Agency (BDA) and the Bermuda Tourism Authority (BTA) create an unprecedented opportunity for traffic figures to grow. Leveraging the strong brand and the impact that the America’s Cup (to be held in Bermuda in 2017) will have, will provide the opportunity for the island to regain Caribbean tourism market share, which has provided strong competition in terms of products and prices in the past two decades. The continuous reduction in frequencies and seats from Bermuda Airport has the effect of decreasing travel options for Bermudians and foreign visitors alike, contributing further to the decline in passengers. Air connectivity is also a key factor in ensuring that the international business activities present in the island have the optimum amount of air services to the mainland necessary to maintain their offshore presence. The international businesses activities (mainly insurance services) are the backbone of Bermuda’s economy, being the single largest contributor to the Bermudian GDP, contributing approximately to a quarter of the GDP output. The presence of this industry is vital to the island’s economy and although it is understood that the presence of international business in Bermuda is not under threat, changes in international agreements and laws can alter the status Air Passengers 2013 quo with companies revaluating the extent of their presence Bermuda, for instance by keeping a smaller representation in the island. The Bermudian macroeconomic environment, measured by the island’s GDP, is a driver for the growth of passengers classified as outbound Bermudians, Vacation 38% VFR 14% Bermudans 40% Business 8% visiting friends and relatives (VFR) and business-related air travelers. The sum of these three segments is defined as “non-vacation” passengers group and its variation on a year-on-year basis is strictly correlated to the variation year-on-year of the Bermudian’s GDP.

Market Context & Analysis. In order to redevelop the airport it is paramount to understand the projected number of passengers and aircraft that will use the airport in the future. This will ensure that all airport facilities are sized to cater for the future traffic and that the estimated revenue streams coming from the aviation industry are satisfactory enough to recoup the monetary investment being undertaken for the redevelopment of this key infrastructure for Bermuda. A total of 774,000 passengers travelled through Bermuda airport in 2013, representing a decrease of 25% compared to 1995 levels. This downward trend continued in 2014, dipping to 750,000 passengers, a further 3% decline. Passenger traffic at Bermuda can be differentiated into four main segments:  • outbound Bermudans,  • inbound vacationers,  • inbound visiting friends and relatives, and  • inbound business/conferences visitors. Each of these components has different drivers and motives to fly to Bermuda, which is considered as one of the world’s strongest country brands although it has lost some positions in the past few years. Of the four market segments, the loss is predominantly in the inbound vacationers segment which has fallen by 45% since 1998, compared to a background of world traffic growth. The main originating markets for passengers travelling by air are:  • United States,  • Canada, and  • United Kingdom. The market that lost most of the passengers is the United States, with Canada and the United Kingdom traffic being fairly static in recent years. The Canadian market has been static in spite of intense competition between WestJet and Air Canada on the Toronto route, which should have resulted in a stimulation of traffic. The UK market is limited to a single route operated by British Airways to London Gatwick and is not subject to a significant increase in operations. Bermuda US connections have air links only to the main US East Coast airport hubs, which provide access to the main gateways and onward connectivity to passengers. The numbers of flights and seats available to these hubs have decreased over time, thus decreasing the overall connectivity for passengers. In particular the New York JFK route has significantly decreased (through reduction of frequencies and aircraft size) a sign of how Bermuda has lost its appeal among its single largest originating market, the New York metropolitan area. Traffic figures indicate that Bermuda has lost its appeal amongst tourists arriving by air, becoming an “out of fashion” destination, with hotel properties closing down, reduction in the room occupancy rates and restricted seasonality of tourism arrivals. This is due to an unclear product offering, the scarce presence of luxury and world class hotel brands, the limited availability of free land space and the high costs of vacationing in the island compared to other destinations. Bermuda is not geographically part of the Caribbean but it competes against the Caribbean islands for inbound tourists. Consequently, Caribbean islands airports are the best comparators for benchmarking Bermuda airport performance. Key performance indicators for airlines operating between the USA and the Caribbean show that Bermuda has the third lowest load factor performance out of a sample of 27 airports. This leads to airlines reducing aircraft size, dropping frequencies and routes and to an increase in the airline fares. Bermuda’s strength lies in being only 2-3 hours from every city in the US East Coast. The US pre- clearance facility provides a quick way of entering the US from abroad. Unlike most of its Caribbean competitors Bermuda benefits from a diverse mix of traffic, linked to the two largest industries in Bermuda: tourism and the international businesses (i.e. insurance activities). On top of this, Bermudans have a very high propensity to fly due to the high income per capita which leads to a higher spending on travel. Bermuda has lost market share of the total Caribbean tourism marketplace in the last two decades from 4% down to 1%. While other areas of the Caribbean have witnessed an increase in the number of tourists arriving by air, these have decreased in Bermuda. Bermuda ranks last among the Caribbean islands in terms of the growth of air tourist arrivals (-3% CAGR between 1995 and 2012). On the other hand the growth in the cruising sector, with tourists arriving on ships from the US East coast has increased over time. However the monetary contribution of this segment of traffic is much lower than the contribution of tourists arriving by air (which spend more for accommodation, transportation and food on the island). In 2013 the average expenditure by cruise ship visitors was of USD 184 against the USD 1,335 spent on average by air passengers. The growth in tourists arriving by sea creates confidence in the fact that Bermuda is still an appealing destination as a whole, with its strength being close to the US East coast. At the same time it underlines the problems evidenced in the Bermudian hotel stock: lack of international brands and prices higher than market average for products that are poorer than the competitor’s. It is key for Bermuda to redevelop its hotel stock also by increasing the amount of hotel concessions released and possibly the building of further all-inclusive resorts to compete effectively against its regional competitors. The redevelopment of the airport, together with the revitalisation of the Bermuda Business Development Agency (BDA) and the Bermuda Tourism Authority (BTA) create an unprecedented opportunity for traffic figures to grow. Leveraging the strong brand and the impact that the America’s Cup (to be held in Bermuda in 2017) will have, will provide the opportunity for the island to regain Caribbean tourism market share, which has provided strong competition in terms of products and prices in the past two decades. The continuous reduction in frequencies and seats from Bermuda Airport has the effect of decreasing travel options for Bermudians and foreign visitors alike, contributing further to the decline in passengers. Air connectivity is also a key factor in ensuring that the international business activities present in the island have the optimum amount of air services to the mainland necessary to maintain their offshore presence. The international businesses activities (mainly insurance services) are the backbone of Bermuda’s economy, being the single largest contributor to the Bermudian GDP, contributing approximately to a quarter of the GDP output. The presence of this industry is vital to the island’s economy and although it is understood that the presence of international business in Bermuda is not under threat, changes in international agreements and laws can alter the status Air Passengers 2013 quo with companies revaluating the extent of their presence Bermuda, for instance by keeping a smaller representation in the island. The Bermudian macroeconomic environment, measured by the island’s GDP, is a driver for the growth of passengers classified as outbound Bermudians, Vacation 38% VFR 14% Bermudans 40% Business 8% visiting friends and relatives (VFR) and business-related air travelers. The sum of these three segments is defined as “non-vacation” passengers group and its variation on a year-on-year basis is strictly correlated to the variation year-on-year of the Bermudian’s GDP.